Weighing up the M&A options

Consolidation is in the air, but regulators – from the US Department of Justice to the European Commission – have their reservations. Gareth Willmer looks at where the deals are

In these still early days of 2018, there are some uncertainties about how the year might pan out for mergers and acquisitions (M&A) in the telecoms world.

A number of moves are afoot in the market – at the time of writing, the world is still awaiting the outcome of the proposed mega-deal between AT&T and Time Warner, while Vodafone and Liberty Global have been in talks about swapping overlapping assets in Europe. Some deals, though, have already gone through.

Some observers see good potential for deals and are optimistic about the way the year has kicked off. Not only that, but the promise of new business areas and the approach of 5G offer carriers the chance to get involved in more deals.

Indeed, the value of deals in the global telco market last year picked up a little compared with 2016, according to figures from financial data company Mergermarket. Although still less than half the typical amount seen in the few years before that, their total value rose, from $83.7 billion in 2016 to $101.8 billion last year.

And M&A activity in telecoms and cable networks will be healthier this year than last, predicts Ragupathy Vellappa, a senior analyst at IDC. This will, he thinks, be driven primarily by factors such as scalability, fixed-mobile convergence, fibre consolidation and interest in vertically integrated assets such as digital media, the internet of things (IoT), IT services and the cloud.

Meanwhile, Rich Karpinski, an analyst at 451 Research, believes that another “super-cycle” of mobile deal-making is looming into view, prompted by the advent of commercial 5G networks worldwide, continuing telco M&A-driven consolidation and activity in related categories like mobile gaming, collaboration and enterprise mobility.

But for mainstream deals, at least, regulatory issues look set to play a key part in how things unfold. The move by the US Department of Justice to block AT&T’s $85 billion Time Warner takeover last November has put a “dampener” on M&A activity, says Roger Entner, founder and lead analyst at Recon Analytics, creating uncertainty about what the government will allow.

The case is due to go to trial in March and Entner thinks that, at least until the situation is resolved, the US telecoms market will not see major consolidation, even though there could still be a continued mop-up of carriers at the Tier 2 and 3 levels. Nonetheless, he adds, “we could see further acquisitions to drive the integration of telecoms, internet and media, especially if AT&T prevails in court”.

Meanwhile, across the water in Europe, there are regulatory uncertainties following the rejection of some in-market mobile deals at a European Union level in recent years – such as the proposed moves between Three and O2 in the UK, and between Telia and Telenor in Denmark.

“The consolidation pressure is actually much stronger than we see, because what is preventing mergers from really proceeding at a pace the market wants is the view from Brussels,” says Bengt Nordström, CEO at ICT consulting firm Northstream. He points out that it seems the European Commission in Brussels wants fouroperator mobile markets in each country rather than three-operator ones.

However, there are some signs that things could be about to change. At the end of 2017, T-Mobile Netherlands announced that it was acquiring Tele2’s Dutch operations. If that gets the necessary regulatory approvals later this year, says Nordström, then it “could possibly signal to other markets in Europe that under certain conditions it is OK to consolidate”.

In the meantime, an area with perhaps more room for manoeuvre is that of fixed-mobile convergence. Indeed, this was the basis of one of the year’s very first deals – the announcement by Sweden’s Tele2 of an agreement to merge with cable operator Com Hem in a $3.3 billion deal. The fresh talks between Vodafone and Liberty Global are another move in this dirction.

Avenues for growth

Nevertheless, some believe that even with this flurry of activity, there are only a limited number of options for these types of deal in markets such as Europe in any case. So given the pressure on carriers’ revenues from legacy services, where might they look to for further M&A growth?

One obvious answer, say analysts, is in new business areas outside traditional telecoms assets, such as digital media, IoT and the cloud – though these clearly bring their own big challenges, with, for example, the hugely varying cultures of the telecoms and media worlds and the demands of new business segments.

Apart from the AT&T-Time-Warner move, Europe seemed on the verge of seeing its own fresh telecoms-media tie-up this February, when Denmark-based TDC Group announced a merger agreement with the MTG Nordics business of international digital entertainment group MTG. This, TDC said, would lead to the formation of “the first fully convergent media and communications provider in Europe”.

However, in February TDC was approached by a private equity consortium with regard to a takeover offer – which would see the MTG deal withdrawn if it goes through. Nonetheless, this is an indication of a way in which the market is moving.

Elsewhere, Kester Mann, an analyst at CCS Insight, believes that carriers might make purchases in areas such as enterprise or IoT, though many of these may be smaller-scale rather than huge wide-reaching deals. Nevertheless, he says: “I wouldn’t rule out in the long-term maybe operators making some bigger moves into vertical segments to try and boost 5G and IoT strategies.”

He points out that connectivity alone represents maybe only a few per cent of an IoT project, so “if operators really want to try and capitalise on the full potential of IoT, maybe they need to make a push into some of these areas” – and M&A could aid this. Such moves would also help operators grab more control of the ecosystem.

Among IoT deals last year were Verizon and Telstra’s respective purchases of Movildata Internacional and MTData in the fleet management sector, and Comcast’s buy of Stringify to integrate its cloud-powered automation technology into Comcast’s Xfinity products.

In cloud services, Brussels-based wholesale carrier BICS closed the acquisition of communications-platform-as-a-service (CPaaS) provider TeleSign for $230 million late last year, creating what it described as “the world’s first end-to-end CPaaS provider”. On the other side of the globe, Telstra snapped up VMtech, a Sydney-based professional and managed services provider with expertise in enterprise-grade hybrid cloud, connectivity and security solutions.

In other areas, Orange has made investments in areas such as its Orange Bank service, which it launched in 2017 after acquiring 65% of Groupama Banque the previous year. This illustrates the operator’s bid to diversify its services and fulfils part of its Essentials2020 strategy, which seeks to meet the changing needs of the telecoms market in areas such as IoT, big data and the cloud, and includes the delivery of mobile financial services as a central component.

On top of other pursuits, Orange also has its Digital Ventures fund, which aims to back start-ups in up-and-coming business areas. “Orange has a very clear focus, through its Orange Digital Ventures fund, to identify and support early-stage start-ups that are transforming the telecommunications and digital sectors with innovative solutions, disruptive technologies or through the invention of new business models in the form of minority shareholdings,” says a spokesperson.

But perhaps the ultimate demonstration of innovation is the SoftBank Vision Fund launched last year, with its investments of tens of billions of dollars in an array of cutting-edge ventures, from artificial intelligence and robotics to a dog-walking start-up. Some analysts believe, however, that it may be difficult to generalise about the Vision Fund as an indication of where the market is headed, because it is led by SoftBank founder and CEO Masayoshi Son.

Nonetheless, the other manoeuvres give an indication of how carriers are seeking to reposition themselves. “The recent M&A trend shows carriers are no longer merely a bandwidth provider, but also an enabler of digital services,” says IDC’s Vellappa.

Data centre moves afoot

A separate trend is movement in the data centre market, particularly in the US, where operators have sought to focus more on their core businesses.

AT&T has again been exploring a sale of its data centre assets, according to reports this February. That comes after Verizon completed the sale of 29 data centres to colocation provider Equinix in 2017, at the same time that CenturyLink announced it had wrapped up the sale of its own data centres and colocation business.

MTN Consulting’s Walker points out that the carrier-neutral data centre segment has swiftly evolved in the past few years and has ready access to capital, thus encouraging plenty of M&A activity from buyers of such assets. Telcos have less need to own the physical assets too, he says, because “carrier-neutral access to data centre space is readily available in the US market, more so than in other regions”.

The movement in the market is reflected in data from Synergy Research Group, which shows that data centre-oriented M&A deals surged to $20 billion worldwide in 2017, surpassing the total for the previous two years combined. The number of deals concluded also exceeded that of the previous two years together, at 48 compared with 45 – with a significant deal almost every week.

By far the biggest recent investors have been Equinix and Digital Realty, another leading colocation provider, which together forked out $19 billion to buy data centre operators between 2015 and 2017, says Synergy. Apart from Equinix’s purchase of Verizon’s data centres, another major deal in that sector last year saw Digital Realty merge with DuPont Fabros in a $7.8 billion deal.

Over the next five years, Synergy predicts even further consolidation in the data centre market, as it is transformed by the drive towards outsourcing and the dramatic growth of cloud providers.

Fibre drive

Observers have noted a trend in fibre consolidation. Fibre and small cells are key components in 4G densification and 5G network employment, required to manage the rising amount of wireless data traffic, especially in crowded urban areas, Vellappa points out at IDC. “This gives an opportunity for real estate investment trusts – such as Crown Castle and Uniti – and private equity firms to invest in the fibre network space.”

Among such recent deals, Crown Castle acquired Lightower for about $7.1 billion, bolstering its position at the US forefront of providing shared wireless infrastructure.

This type of move “validates the importance of the small cell market, and the need for more fibre to support 5G”, says Walker. “We will see more companies expanding their small cell networks and tying them together with fibre cables.”

Meanwhile, in a reflection of how carriers are gearing up for 5G, Verizon has made a series of buys to boost its position in this area. For example, last year it agreed to acquire Straight Path, which holds millimetre-wave spectrum configured for 5G services, snapped up XO Communications’ fibre-optic network business, and purchased fibre-optic network assets serving the Chicago market from WideOpenWest.

Amy-Jo Crowley, a reporter on technology, media and telecommunications in the EMEA region for Mergermarket, believes the UK IT and telecoms services market could see more consolidation. “The need to scale up and widen the scope of services offered to UK enterprises will accelerate M&A activity over the coming months for both small and midsize companies,” says Crowley. “Much of the appetite has been driven by the potential for cost synergies and the need to gain scale and develop products, especially across cloud and data usage.”

But the overall global picture is that there seems to be consolidation happening on several different levels in the industry. The question for operators is therefore how they choose to add value on top of this, and whether M&A is set to play a central part in this. That is a big question to answer.